The stock market appears to be heading toward one of those rare occasions, when a record high contributes to a bearish technical pattern, that suggests the biggest selloff of the year could be right around the corner.

The S&P 500’s
SPX, +1.32%
seesaw action over the last several months is building what chart watchers call a classic “megaphone,” or a “broadening top” pattern, that reverses the rising trend that preceded it.

A textbook pattern, as shown below, starts with three higher highs, and two lower lows. The idea is, trends tend to reverse following periods of rising volatility, as increased uncertainty keeps sellers at bay a little longer, and as buyers need deeper dips to jump in.

“Usually in solid uptrends, the range in short-term price action tends to narrow,” said Dan Wantrobski, technical analyst at Janney Capital Markets. “As bulls and bears start to duke it out in a larger scale, the trading range becomes wider.”

And the S&P 500 has been moving in a textbook megaphone pattern since June. Tuesday’s record high close of 2039.68 is the third higher high, while Oct. 15 close of 1820.66 is the second lower low.

“There’s a bit of waffling, in the confidence of this market,” Wantrobski said. “Market participants are becoming a little bit more uncertain. It’s creating more volatility.”

He said if the S&P 500 starts turning lower from resistance at the rising trendline, and its trading pattern turns into a legitimate megaphone reversal, “then the S&P 500 could experience a decline in excess of 10% from its peak,” to where the lower trendline is headed.

That would mark the first true correction--a decline of at least 10% to up to 20% -- since October 2011. The S&P 500 fell just 9.5% from the Sept. 18, 2014 closing high of 2011.36 to the October low.

The Dow Jones Industrial Average
DJIA, +1.38%
appears to be building a bearish megaphone reversal pattern of its own. And technicians always say, the more similar patterns appear across indexes, the more likely they are to play out.

That said, Wantrobski isn’t expecting the megaphone pattern to define a long-term market top, that leads to a big bear market, which would be characterized by a decline of at least 20%. “It think it’s just a shot across the bow,” he said.

The good news about a megaphone pattern, is that it’s easily negated. A further rally from current levels that clears the resistance line by a wide margin would do it. Or, if the S&P 500 dips only slightly, before returning to make a fourth higher high.

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